WGL Holdings Inc (NYSE:WGL)
Q4 2016 Earnings Conference Call
November 17, 2016 11:00 AM ET
Doug Bonawitz - IR
Terry McCallister - CEO
Vince Ammann - CFO
Adrian Chapman - COO
Gautam Chandra - SVP Strategy, Business Development & Nonutility Operations
Sarah Akers - Wells Fargo
Good morning and welcome to the WGL Holdings Inc. Fourth Fiscal Year 2016 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only-mode. [Operator Instructions]. The call will be available for rebroadcast today at 1:00 p.m. Eastern Time running through November 28, 2016. You may access the replay by dialing 1-855-859-2056 and entering PIN number 14406132.
I will now turn the conference over to Doug Bonawitz. Please go ahead.
Good morning, everyone and thank you for joining our call. Before we begin, I would like to point out that this conference call will include forward-looking statements under the federal securities laws. Forward-looking statements inherently involve risks and uncertainties that could cause our actual results to differ materially from those predicted in such forward-looking statements. Statements made on this conference call should be considered together with cautionary statements and other information contained in our most recent annual report on Form 10-K and other documents we have filed with or furnished to the SEC.
Forward-looking statements speak only as of today and we assume no duty to update them. This morning’s comments will reference presentation. Our earnings release and presentation are available on our website. To access these materials, please visit wglholdings.com. The presentation highlights the results for our fourth quarter of fiscal year 2016 and the drivers of those results. On today’s call, we will make reference to certain non-GAAP financial measures, including operating earnings of WGL Holdings on a consolidated basis and adjusted EBIT of our operating segments.
A reconciliation of these financial measures to the nearest comparable measures reported in accordance with Generally Accepted Accounting Principles, or GAAP, is provided as an attachment to our press release and is available in the quarterly results section of our website. This morning, Terry McCallister, our Chairman and Chief Executive Officer will provide some opening comments. Following that, Vince Ammann, Senior Vice President and Chief Financial Officer will review fiscal year 2016 results as well as fiscal year 2017 guidance. Adrian Chapman, President and Chief Operating Officer will discuss key issues affecting our business and the status of some of our principal initiatives. And in addition, Gautam Chandra, Senior Vice President of Strategy, Business Development and Nonutility Operations is also with us this morning to answer your questions.
And with that, I would like to turn the call over to Terry McCallister.
Thanks Doug, and good morning everyone. Today we will review our full year financial results and lots of service that's effecting our business and including these guidance for fiscal year 2017. I am happy to report to you fiscal year 2016 financial results that exceeded our initial earnings targets for the year as well as our most recent guidance.
As shown on Slide 5 in our presentation, we end this fiscal year 2016 with consolidated non-GAAP operating earnings of $155.1 million or $3.27 per share this compares to a $158.2 million from the prior fiscal year or $3.16 per share. This is a record level of earnings for WGL Holdings, we have realized 11% annual compound growth rate in earnings per share since 2014 when we first communicated a target to deliver earnings growth of 7% to 10% annually over five years. And particularly pleased to see our financial performance balanced across all of our business segments, which demonstrates the strength of our entire business portfolio we are proud of our continuing track record of delivering strong earnings growth and value for shareholders.
Earnings were lower year-over-year at utility partially due to lower margins from our asset optimization program which had a record year in fiscal year 2015. Utility results did benefit from stronger customer growth and rate recovery related to our accelerated pipeline replacement programs. We added approximately 12,500 active utility customer meters in 2016 which represents an annual growth rate of 1.1%, we’ve spent $133 million on accelerated pipe replacement program in fiscal year 2016, which is a record amount significantly higher than our original forecast of $113 million.
Performance of our asset optimization program on a lower than last year's record did results in our second best year ever. In addition, our two rate cases in the District of Colombia and Virginia have been progressing towards conclusion as expected and Adrian will talk about that shortly. Performance of our non-utility businesses as a whole exceeded our initial guidance for the year. Our three non-utility operating segments generated a record total of a $99 million adjusted EBIT during fiscal year 2016.
Both commercial energy system and midstream energy services set new highs in our earnings. Our retail energy market did not meet last year record earnings, results did exceed our initial expectation. Segments delivered $54 million in adjusted EBIT over 10 million more than our original forecast. This business continues to meet or exceed our long-term adjusted EBIT targets, which remains in the range of $50 million to $55 million per year.
Commercial energy systems business delivered a 63% increase in adjusted EBIT compared to last year driven by increase earnings from our energy efficiency contracting activities and the utility like distributed generation assets that we have in our portfolio. We invested a record amount of the $153 million from distributed duration assets during fiscal year 2015. This amount includes our first tax equity investment which Vince will discuss in greater detail shortly.
Midstream energy services also exceeded its earnings target this year primarily due to the optimization opportunities and favorable storage spreads.
Turning to the longer term view, while we have experienced delays in our interspaces pipeline investments, there were two significant transactions this year that will position this business well for the future. We exercised our option to acquire 30% of Stonewall Gathering system which delivered $6 million in adjusted EBIT during the last several months of the fiscal year. We also acquired an additional 3% interest in the Mt. Valley pipeline increasing our ownership to 10%.
Turning to fiscal 2017, in our earnings release yesterday we introduced consolidated non-GAAP earnings guidance for fiscal year 2017 in a range of $3.30 to $3.50 per share. In delivering this level of earnings in 2017, we will continue to meet our commitment by exceptional earnings growth for our shareholders.
I’ll now turn the call over to Vince.
Thank you, Terry. Turning first to our Utility, adjusted EBIT for the fiscal year 2016 was $224.3 million, a decrease of $11.4 million compared to the last year. The drivers of this change are detailed on Slide 7. We saw a strong customer growth in fiscal year 2016, and the addition of 12,500 average active customer meters, improved adjusted EBIT by $7 million. Higher revenues from our accelerated pipe replacement programs added $12.9 million in adjusted EBIT.
Offsetting these items, lower realized margins associated with our asset optimization program reduced adjusted EBIT by $5.7 million. The unfavorable effect of changes in natural gas consumption patterns in the District of Columbia reduced adjusted EBIT by $5.7 million. Reduced revenues related to the recovery of gas inventory carrying costs reduced adjusted EBIT by $2.6 million. Higher depreciation expense reduced adjusted EBIT by $5.7 million reflecting growth in our investment in utility plans. Higher operations and maintenance expense reduced adjusted EBIT by $5.4 million. And other miscellaneous items including general taxes and other assessments reduced adjusted EBIT by $6.2 million.
I would also like to highlight the performance of our asset optimization program for the full year, this program generated a total of $32 million and adjusted EBIT for the utility of this year and also delivered $42 million in benefits to our customers through our sharing mechanisms. Asset optimization activity this year will also deliver results in 2017 due to the deferred storage earnings which I’ll discuss further when I'm addressing fiscal year 2017 guidance.
Turning to the retail energy marketing segment, adjusted EBIT for fiscal year 2016 was $54.2 million, a decrease of $14.3 million compared to the same period last year. On Slide 8, you will see that the decrease was driven primarily by lower natural gas gross margins with electric gross margins flat compared to the prior year.
In the natural gas business, gross margins were $11.9 million lower, primarily due to a significant decrease in portfolio optimization margins. Fiscal year 2015 was an exceptionally favorable year for this activity. Operating expenses increased by $2.4 million primarily due to commercial broker fees. As of September 30, we have approximately 127,000 electric accounts and 133,000 natural gas accounts.
In fiscal year 2016, electric volumes increased 9% compared the prior period -- per year, this is indicative of our revised focus on large commercial and government account relationships. Natural gas retail volumes excluding portfolio optimization activities decreased 9% versus the prior year due to warmer weather in fiscal year 2016.
Next, I will move to the commercial energy systems segment. Adjusted EBIT for fiscal year 2016 was $27.3 million, an increase of $10.5 million compared to the same period last year. As shown on Slide 9, the increase reflects higher margins from our energy efficiency contracting business. Growth in distribution and generation assets in service and higher equity earnings from alternative energy investments. These improvements were partially offset by higher expenses reflecting an impairment related to our Nextility investment in thermal solar projects and other operating expenses.
Revenue in our design build business more than doubled to $53 million in fiscal year 2016. Our commercial distribution -- distributed generation assets generated over 211,000 megawatt hours of clean electricity during fiscal year 2016, which is sold to customers through power purchase agreements. This represents a 43% increase in megawatt hours compared with fiscal year 2015. We now have 235 projects in our commercial distributed generation portfolio, representing approximately 145 megawatts in service and an additional 56 megawatts is contracted or under construction. In fiscal year 2016 commercial energy systems invested total of $162.6 million of this amount 12.6 million of solar assets were sold to a new tax equity fund.
In August WGL entered into an agreement with tax equity partner to acquire solar projects in Georgia. WGL will provide a cash equity and our partner will provide tax equity contribution towards the purchase price of solar assets from WGL energy systems.
As of September 30th, the commercial energy system segment has invested $547 million in distributed generation assets. Our alternative energy investments, which includes ASP, Nextility, and SunEdison and the new tax equity fund represents an additional $137 million in capital investments. We have now invested approximately $684 million in total in this segment since inception.
Next, I will move to the midstream energy services segment. Adjusted EBIT for fiscal year 2016 was $17.8 million an increase of $21.4 million compared to the same period last year. As shown on Slide 10, the increase was primarily related to favorable storage spreads when compared to the same period in the prior fiscal year. As well as higher income related to our pipeline investments notably the Stonewall Gathering system.
These results reflect an adjustment to eliminate losses of $15.2 million associated with the index price used in certain gas purchases from Antero Resources Corporation, which is the subject of an arbitration proceeding. We expect that this arbitration proceeding will commence in January of 2017.
Turning to the competition pipeline, we have evaluated the New York State Department of Environmental Conservation decision regarding water quality certification as well as subsequent actions taken by a constitution pipeline that challenge the denial. We’ve made the determination that an impairment of the asset is not necessary at this time. Results for our other nonutility activities reflect an adjusted EBIT loss of $3.2 million compared to a loss of $4 million of the prior fiscal year. Interest expense primarily driven by long-term debt increased to $52.3 million compared to $58.5 million in the prior fiscal year.
I’ll now move to our initial guidance for fiscal year 2017 earnings. As Terry stated earlier, our consolidated non-GAAP earnings guidance for fiscal year 2017 is in the range of $3.30 to $3.50 per share. As noted in the assumption on Slide 12, this guidance includes dilution from the planned issuance of equity in fiscal year 2017. We plan to raise between $300 million and $350 million from equity issuances in 2017, which will be used primarily to finance investments in our utility and midstream businesses.
At this time, we are still targeting the long-term capital structure of 50% equity and 50% debt from a consolidated business. Please note that a portion of these equity issuances will utilize our existing ATM programs. In November, 2015 WGL entered into an agreement under which WGL will sell common stock with an aggregate sales price of up to $150 million through an aftermarket or ATM program. During fiscal year 2016, WGL issued 1,152,305 shares of common stock under the ATM program for gross proceeds of $78 million.
For fiscal year 2017, our expectations for the regulated utility are higher as adjusted EBIT is projected increased by 8% to $243 million. Utility is shown on Slide 13, utility net revenues will be higher driven by customer growth accelerated replacement program and the resolution of pending rate cases in the District of Columbia and Virginia. These improvements will be offset by higher depreciation expenses due to increased plant addition and higher operating and maintenance expense.
Based on differed storage earnings of this winter and other hedging opportunities deployed $15 million of the adjusted EBIT we expect from our utility asset optimization in fiscal year 2017 is already locked in. $29 million of total asset optimization EBIT forecasted in fiscal year 2017 assumes normal level.
As shown on Slide 11, total adjusted EBIT from our three non-utility operating segment is projected to increase by 20% to $119 million in fiscal year 2017. The retail energy marketing segment is forecasting lower earnings in fiscal year 2017. As shown on Slide 14, this guidance reflects higher electric margins, lower natural gas margins and higher operating expenses. Electric margins are forecasted to be a higher due to continued sales volume growth in this segment, but no significant changes in PJM capacity prices. Gas margins are expected to be relatively flat, operating expenses in this segment are expected to increase primarily driven by the costs relating to customer growth.
Commercial energy systems segment is forecasting higher earnings in fiscal year 2017. As shown on Slide 15, our distributed generation assets are expected to produce and an additional $12 million in adjusted EBIT. We expect our distributed generation assets will produced 300,000 megawatt hours of electricity representing a 40% increase in generation. Energy efficiency contracting will decrease by $2 million in adjusted EBIT.
Alternative energy investments including tax equity investments will drive an increase of $14 million in adjusted EBIT. Operating expenses are projected to increase by $2 million. We are assuming that half of our planned investment of $100 million from distributed generation assets in fiscal year 2017 will be through tax equity agreements. These relationships currently take the form of a flip structure which are currently accounted for under the hypothetical liquidation book value or HLBV accounting method. As I previously noted we signed our first tax equity agreements in August. We recently signed an agreement with a second tax equity partner and we are current in negotiations with the third potential partner.
The Midstream energy services segment is forecasting higher earnings in fiscal year 2017. As shown on Slide 16, less favorable storage spreads and other commodity margin impacts will drive a decrease of $3 million in adjusted EBIT. Pipeline investments will produce an increase of 6 million in adjusted EBIT. Please note of this $6 million increased, $4 million is from the Stonewall Gathering system which is projected to earn a total of 10 million and adjusted EBIT for fiscal or whole WGL in its first full fiscal year. Operating expenses are projecting to increase by $1 million.
This guidance assumes an adjustment to eliminate projected losses associated with the index price used in certain gas purchases from Antero which is the subject of arbitration. These losses are expected to reverse in future periods upon completion of the arbitration proceedings which are scheduled to commence in January 2017.
I’ll now turn the call over to Adrian for his comments.
Thank you, Vince and good morning, everyone. I am pleased to provide you with an update on our regulatory initiatives.
In the District of Columbia, Washington Gas filed an application in February with the Public Service Commission to increase its base rates for natural gas service. After subsequent adjustments the current value of the revenue deficiency is $17.3 million.
As part of this filing, we requested approval of three key items including a Revenue Normalization Adjustment or RNA, a new combined heat and power rate schedule to better meet customer needs and a new multifamily development incentives to help bring the benefits of natural gas to more residents in the District of Columbia.
The application request authority to earn an 8.23% overall rate of return, including a return on equity of 10.25%. Our financier Hearings concluded on November 2nd and finally briefs are due to the commission on December 13th. We continue to anticipate a commission final order in March for 2017.
In Virginia, Washington Gas filed an application in June with the State Corporation Commission to increase its base rates for natural gas service generating $45.6 million in additional annual revenue. The revenue increase includes $22.3 million associated with investments in infrastructure replacements made pursuant to Virginia’s SAVE plan and previously approved by the Commission to be recovered from customers through a surcharge.
The application request authority to earn an 8.21% of overall rate of return including a return on equity of 10.25%. Our procedural schedule is issued by the Virginia SEC and a reader testimony is due on January 31st. The SEC staff’s testimony is due on February 28, and hearings are scheduled for April 2017. Washington Gas will place its proposed rates into effect on an interim basis subject to refund for usage in the December 2016 billing cycle.
Also a quick update on potential investment in physical gas reserves benefit our Virginia customers. As noted on the August call the current market environment for natural gas with price curves that are low over an extended period of time has made it a challenge to structure an agreement that will generate significant savings for customers and satisfy the public interest standard of the Virginia SEC. However, we are continuing to evaluate alternatives to our original proposal that will meet the requirements of the SEC.
I would also like to update you on the WGL Holding's capital expenditures forecast. Our current forecast as shown Slide 18 in the presentation calls for us to invest $574 million in 2017 and $3.4 billion cumulatively into 2017 through 2021 timeframe. This represents a decrease of $236 million for 2017 compared to our prior forecast and a net increase of $195 million for the four year period of 2017 through 2021. The primary driver of the decrease for fiscal 2017 is $264 million shift of mid-stream pipeline investment into later years, Terry will discuss this in a few minutes.
The primary driver of the increase over the extended period is a net increase of $104 million related to pipeline investments as we have acquired an additional interest in the Mt. Valley pipeline. In addition expenditures related to our utility accelerated replacement programs are expected to increase by $49 million. Our utility for 2017 to 2021 period includes approximately $760 million of planned expenditures to meet the requirements of the accelerated pipe replacement program in place in our three of our jurisdictions.
We will continue to invest approximately$100 million annually and distribute the generation asset including our contribution to tax equity investments. The total amount is unchanged from our previous forecast. Before I close, a brief comment on the investigation into the explosion fire at an apartment complex in Silver Spring, Maryland that occurred a few days after our last earnings call. First and foremost our deepest and sincerest condoles remain those impacted by what occurred in Silver Spring and we continue to support the community in every way we can. As you may have seen in the press Washington gas was invited by the NTSB to be party to the investigation and in that capacity continues to work closely with the NTSB to help determine the cause of this tragic event.
For further information about our obligations as assigned party to the investigations, I would refer you to the certificate of party representation document which is available on the investigation's page of the NTSB website. We have included a link to the investigation's web page as well as a link to this document on Slide 19 in the appendix of our presentation.
Finally, as noted in our 8-K filings, Washington gas maintains excess liability insurance coverage and we believe that this coverage will be sufficient to cover any significant liability that makes [technical difficulty].
I would like to now turn the call back to Terry for his closing comments.
Thank you, Adrian. I would now like to provide an update on the status of our Midstream investments. We currently have four mid-stream infrastructure projects one in service with Stonewall Gas Gathering systems and three in developments specifically the Constitution pipeline, the Central Penn pipeline and Mt. Valley pipeline. Stonewall Gathering system is currently transporting approximately one billion cubic feet a day of natural gas from the Marcellus production region in West Virginia. In September DTE energy purchased 55% of Stonewall from M3 Midstream and Vega Energy partners.
Our ownership status remains at 30%, these assets will become part of DTE gas storage pipeline business, and we’re agree with the DTE’s statement that these assets in the Marcellus has significant growth potential and we look forward to working with our new partner at DTE Energy.
Next is a brief status update regarding our investments in the Constitution pipeline project. You may recall Constitution filed two separate federal court actions appealing the New York denial of water quality diversification. We continue to await action by the court and the target in service days remains in second half of calendar year 2018. Partner’s appeal of the denial of the water permit was held yesterday by the U.S. court of appeal for the second circuit court, so as of yesterday we’re awaiting a decision.
Next I’ll turn to our investment in our Central Penn line, which is a Greenfield segment of Transco’s Atlantic Sunrise project. Williams recently revised the full in service status project for mid calendar year 2018, in response to FERC’s revised environmental review schedule. FERC’s staff now our plan to issue the final environmental impact statement by December 30, instead of October 31. This change was made primarily to accommodate comments from land owners, regarding two minor alternatives, totaling 1.4 miles. Cooperating federal agencies will then have until March 30, to complete their own work on the project review.
I would like to note that on October 27, Pennsylvania’s governor Wolf commented that new energy infrastructure projects including Atlantic Sunrise are critical to Pennsylvania’s economic future. We appreciate the governor support and we look forward to receiving a final EIF in December and beginning constructing in mid-2017.
Our third pipeline investment involves the Mt. Valley pipeline project, which is a proposed 300-mile pipeline through West Virginia and Virginia.
FERC the Draft Environmental Impact statement for the project on September 16th, final environmental impact statement is expected March 10th. The target in service base coming December of 2018. On October 31, WGL Midstream announced that it increased its ownership interest in the Mountain Valley pipeline by acquiring Vega’s representing interest. WGL Midstream now owns a 10% interest in Mt. Valley pipeline. Our estimated aggregate investment in Mt. Valley pipeline is now expected to be approximately $326 million, an increased $98 million from our previous plan to invest $228 million in this project.
As we look to next year, I’m proud that our delivered exceptional financial performance this year, delivering earnings per share of $0.17 higher in our initial guidance. Our guidance for 2017 reflects growth potential that we see in our strong portfolio, as energy systems and midstream will continue to generate a larger share of total nonutility earnings, creating a more balanced portfolio of regulated or utility like earnings.
While we already have a very active capital spending plan in place over the next 2 years, we will continue to look for opportunities to invest in projects that are in line with our strategic vision and that will add shareholder value with consistent long-term earnings. We are well positioned to deliver our target of 7% to 10% earnings growth and we look forward to providing more detail on our Analyst Meeting scheduled to March in New York.
This concludes our prepared remark and we’ll now be happy to answer your questions.
The question-and-answer session will now begin. [Operator Instructions]. Again I would like to remind everyone that you can listen to a rebroadcast of this conference call at 01.00 PM Eastern Time today running through November 28, 2016. You may access the replay by dialing 1855-859-2056 and entering pin number 14406132. Our first question comes from the line of Sarah Akers of Wells Fargo. Your line is open.
So just a question, did I hear you correctly the equity for ’17 was planned at 300 million to 350 million?
And is that pre-funding of MVP and Central Penn, or will you need additional equity when the spending starts to ramp on those projects?
I think we’re -- in the slides we provided in the past, we’ve shown equity issuance through’18 Sarah. So as we continue our spending, we’ll still be raising more debt and equity.
Got it. Okay. That’s all I have. Thanks a lot.
[Operator Instructions] Okay. There are no further questions, I’d like to turn the call back to Mr. Bonawitz for any additional or closing remarks.
Well thank you, everyone for joining us this morning. If you do have further questions, please don’t hesitate to call me at 202-624-6129. Thanks again and have a great day.
And this concludes our conference call for today. Thank you for participating. All parties may disconnect now.
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